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Simple English definitions for legal terms
formula AB trust
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A quick definition of formula AB trust:
A formula AB trust is a way for rich married people to avoid paying too much estate tax. When one spouse dies, their property is split into two trusts. The first trust, called the bypass trust, is for the deceased spouse's property up to a certain amount. This trust is given to other people, usually their children, and the surviving spouse can't use it too much. The second trust, called the survivor's trust, is for the surviving spouse's property and they can use it however they want. When the surviving spouse dies, both trusts go to the people they named to get them.
A more thorough explanation:
A Formula AB trust is a legal tool used by wealthy married couples to maximize their estate tax exemptions. It involves creating two separate trusts after one spouse passes away.
One trust, called the Bypass Trust, holds the deceased spouse's portion of the couple's property up to the applicable exclusion amount (which is currently $12.06 million in 2022 for individuals). This trust is irrevocable and will pass to beneficiaries other than the surviving spouse, usually their children. The surviving spouse must follow the trust's plan without overly benefiting from its operation, but they often receive income from the trust to live on for the rest of their life.
The other trust, called the Survivor's Trust or Trust A, holds the surviving spouse's portion of the property. The surviving spouse has control over this trust and may use it as they wish. When the surviving spouse passes away, both trusts pass completely to their named beneficiaries.
For example, let's say John and Jane are a wealthy married couple. John passes away, and his portion of the couple's property is put into the Bypass Trust, while Jane's portion is put into the Survivor's Trust. The Bypass Trust will pass to their children, while Jane has control over the Survivor's Trust. When Jane passes away, both trusts will pass to their named beneficiaries.
Formula AB trusts are called "formula" trusts because they are designed to not exceed the applicable exclusion amount. This means that the trusts are structured in a way that ensures that the couple's estate tax exemptions are maximized without incurring additional taxes.